2017-10-02

The End of the Beginning: Catalonia Says Adios to Spain and EU Austerity

Catalonia marks the end of the beginning. The first phase of negative social mood is over, culminating in an overwhelming vote for independence. The next phase, political breakup, is underway. If Catalonia leaves, it will serve as an example for other nations across Europe. If it is crushed, unity can be imposed by force. Spain will pay a high price either way. Thus far, the EU sounds anti-Spain more than pro-Catalonia.

Catalan officials claimed 90% of 2.2million voters had called for independence in an 'illegal' referendum blighted by violent scenes which left at least 888 people injured.

World leaders condemned the brutal scenes after officials revealed that hundreds of protesters have been injured so far.

Officers were seen kicking and stamping on protesters as they stormed buildings and seized ballot boxes.

Footage captured in the village of Sarria de Ter in the province of Girona showed authorities using an axe to smash down the doors of a polling station where Catalan president Carles Puigdemont was due to cast his vote.

Mr Dastis said: "I don't agree with you that this is an extraordinary level of violence.

"You may think people were peacefully exercising their right to vote but the problem is this so-called referendum had been held to be illegal by the constitutional court."

Catalonia was a prime spot for secession because it has its own language and culture. America has multiple languages and openly celebrates multiculturalism. It is not a question of if America will break apart (or descend into civil war) but when, as long as social mood remains on a negative trajectory.

One factor overlooked in some of the mainstream Catalonia coverage is the economic and political factors. This vote was a direct consequence of the European Central Bank and European Commissions austerity program. Since the West is now in decline, it is fighting over how the pain is distributed. Catalonia is wealthy and supports Spain. Left-wing Catalonia did not like paying for the rule of right-wing Spain (shades of #CalExit).

Across the developed world, the debt crisis has only been delayed. The longer it takes to play out, the longer secessionists will have to build their movements. In the United States, the failure of pensions across private industry and a dozen or more states in on the way. Demographics in Europe and Japan are even worse.

The markets in Spain haven't performed terribly (the chart below is Spanish ETF, so it includes losses caused by the euro's slide since 2008). If the market reflects social mood, Spain is also at a bear-market rally peak in social mood.

Here's the United States' social mood, as represented by the stock market.

Consider the divisions within the country, racial tensions, the recent battles over the national anthem and Confederate statutes. Now imagine what American politics would look like if the S&P 500 Index falls 60 percent and remains 25 percent below its peak a decade later. Multiple pension funds will fail, several states could go bankrupt, social services will be cut, police salaries will be cut (they're already quitting because of rising social tensions). California is already talking of leaving (and Silicon Valley might leave California). Any state with natural resources (most of the West and Alaska) could instantly increase its GDP by kicking the EPA out of its territory. Layer on racial/political tensions. Great tensions lie ahead for those united States.

Finally, the next phase down for the global financial system is as likely to come from politics as economics. Investors are mostly ignoring the result in Catalonia, not making connections to their domestic economies/governments. This is very misguided, in part because politics is more predictable than economics these days. Nationalism, identity politics and sovereignty are ascendant. Where these forces conflict with economic and financial stability, the loser will be stability.